In the US stock options market, traders are engaging in a frenzy of bullish derivatives contracts, spurred by fear of missing out (FOMO) from the recent stock market rally. Analysts noted that this enthusiastic trading activity is further driving the stock’s gains.
Over the past month, the S&P 500 index rose nearly 8%, hitting its highest level in more than a year. In particular, there has been a substantial rush into call options, which are typically purchased to express optimism about price movements.
A staggering 1.8 million S&P 500 calls were traded on Thursday, a record number. Although a significant portion of the trading involved very short-term contracts, this increased activity indicates that investors are positioning their portfolios to capitalize on potential future gains in stocks over the coming weeks and months.
The influx of calls has driven the S&P 500 index’s monthly moving average of calls and puts to its highest level in at least four years, according to data from Trade Alert. Year to date, the index is up about 15%, while the tech-heavy Nasdaq 100 index is up an impressive 39%. Call bias, a measure of demand for call options, has also seen a notable increase. Susquehanna analysis revealed that a measure of 90-day bias in the iShares Russell 2000 ETF has soared to two-year highs after hitting two-year lows in the previous two months.
Susquehanna strategist Christopher Jacobson noted: “(This) suggests there are a number of investors who are hesitant to buy stocks at these levels but who, understandably, are grappling with questions about valuation and fear missing out if the stock continues to rise.”
Furthermore, the rise in call options has not only contributed to the rally, but has also affected market makers and traders who sell these options. As traders buy calls, market makers and traders are forced to balance their positions by purchasing the underlying stocks or indices, thus putting upward pressure on the markets, according to Brent Kochuba, founder of options analysis service SpotGamma.
However, caution is advised in the short term due to the extreme activity around call options. Kochuba anticipates some type of market pullback in the near future, saying, “The trend is probably bullish… but in the very short term we have surpassed our skies.”
The enthusiasm and FOMO-driven trading in the options market serves as a testament to the current market sentiment. While this fuels the ongoing rally, investors are advised to remain vigilant, keeping in mind the possibility of short-term market corrections.
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